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Earnings Surprises Will Be Mostly Pleasant: Strategist

Monday, 19 Jul 2010 | 8:25 AM ET

The market is set for a strong earnings season with corporate guidance giving a clear indication that surprises will be on the upside, according to Saxo Bank.

"Our base case is that we should expect strong earnings season. Contrary to the first quarter earnings season, this time round it is not going to be fuelled by big upside surprises from financials," Christian Blaabjerg, chief equity strategist at Saxo Bank, told CNBC.

"We should instead direct our look to sectors like consumer discretionary, industrials and technology for upside surprises," Blaabjerg added.

He pointed to the historical relationship between management guidance and earnings, adding that the guidance ratio, defined as positive to negative guidance by management, has for the last three months been at 1.1 for the second quarter, which in historical terms compares favorably with the 10-year average of 0.6.

When companies issue positive guidance then earnings are twice as likely to surprise on the upside, Blaajberg said. The main reason for this, he suspects, is that management tends to be conservative in their estimates of performance.

In addition, Saxo believes we are witnessing a powerful V-shaped recovery with a high probability that we will see 30-40 percent global earnings per share growth in 2010.

Saxo does however forecast a high risk of a double dip globally at some stage but says that even in that scenario earnings per share will be more resilient than investors might expect.

"We estimate that the global corporate cost base is currently 11 percent lower than it was back in 2007-08," Blaajberg said.

"We think that this will be helpful in protecting the global EPS from the effects of any global economic downturn in 2011….We believe we are in for an almost flat EPS growth in 2011, while picking up again in 2012," he said.

CNBC Data Pages:

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Disclosures:

Disclosure information was not available for Christian Blaabjerg or his company.

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